Carmichael v. Commissioner

Lemuel Alexander Carmichael, Petitioner, v. Commissioner of Internal Revenue, Respondent Carmichael v. Commissioner Docket No. 19659 United States Tax Court 14 T.C. 1356; 1950 U.S. Tax Ct. LEXIS 132; June 30, 1950, Promulgated *132 Decision will be entered under Rule 50. Petitioner was obligated under both a divorce decree and agreement incident thereto to pay both his wife and daughter, as alimony to the former and maintenance to the latter, cash installments of a specified principal sum over a period of 9 years. By the same instruments he was required to place insurance policies on his life in escrow to secure payment of a portion of the principal sums due and payable to the wife and daughter. Finally, the decree and agreement incident thereto obligated him to vest title to an insurance policy on his life in his wife as additional alimony, and vest title to another insurance policy on his life in his daughter as additional maintenance. In 1945 petitioner paid the cash installments to both his wife and daughter and paid the premiums on all the insurance policies. On the facts, held, (1) petitioner was not entitled to deduct cash installments of alimony paid his wife in 1945 under section 23 (u) of the Internal Revenue Code, since they were installment payments not includible in her income under section 22 (k) of the code; (2) petitioner was not entitled to deduct premiums he paid on the escrowed *133 policies in 1945 under section 23 (u) because they were not constructively received by his wife so as to constitute income to her under section 22 (k); (3) petitioner was entitled to deduct premiums paid on the insurance policy title to which was vested in his wife, since they were constructively received by her so as to constitute income to her under section 22 (k); and (4) petitioner was not entitled to deduct premiums paid on the insurance policy title to which was vested in his daughter, since this policy constituted an additional award of maintenance to the daughter, excludable from the wife's income by section 22 (k). Robert S. Eastin, Esq., for the petitioner. Marvin E. Hagen, Esq., for the respondent. Hill, Judge. HILL *1357 Respondent determined a deficiency in the income tax of petitioner for the calendar year 1945 in the amount of $ 824.59. The sole question for our determination in this proceeding is whether petitioner is entitled to deduct a total of $ 2,075.20 or any part thereof from his gross income for 1945 as alimony payments under section 23 (u) of the Internal Revenue Code. FINDINGS OF FACT. Part of the facts were stipulated and are so found. Petitioner*134 is an individual, residing in Anderson, South Carolina. During the calendar year 1945 and until March 15, 1946, petitioner was a resident of Kansas City, Missouri. Petitioner filed his income tax return for the calendar year 1945 with the collector of internal revenue for the sixth district of Missouri on March 15, 1946. Prior to June 21, 1945, petitioner was married to Vieva Margarett Carmichael. They had one child, Donna Sue Carmichael, who was a minor on that date. On December 13, 1944, petitioner commenced an action of divorce against his wife in the Circuit Court of Jackson County, Missouri. She appeared in such action and filed an answer and cross-petition, in which she sought a divorce from petitioner. On or about June 11, 1945, while the divorce action was pending, petitioner and his wife entered into a written agreement, entitled "Property Settlement Agreement," to adjust their property rights in the event a divorce was granted. It stated in part: 1. Alimony & Maintenance -- Lump sum. First party shall pay, and second party shall receive, as alimony and maintenance in gross, the sum of Twenty-Seven Thousand & No/100 ($ 27,000.00) Dollars in installments payable*135 as follows, to-wit: Two Hundred Fifty & No/100 ($ 250.00) Dollars on the 15th day of June, 1945, and Two Hundred Fifty & No/100 ($ 250.00) Dollars on the 15th day of each succeeding month thereafter, until the whole sum named is fully paid, without interest as long as the installments are paid on the date when they are due. Of this amount, Two Hundred & No/100 ($ 200.00) Dollars monthly shall be considered alimony, and Fifty & No/100 ($ 50.00) Dollars monthly shall be considered as maintenance for the minor child of the parties, Donna Sue Carmichael. This sum shall be paid in its entirety, and shall be paid in accordance with the schedule of installments herein agreed upon regardless of what the earnings of first party may be, regardless of whether or not Donna Sue remain single or alive during the period provided for the payment of these installments, and regardless of the fact that Donna Sue will become of age on February 18, 1954, and regardless of second party's remarriage. This provision for the payment of alimony and maintenance in gross shall be incorporated into the decree awarding a divorce to *1358 the second party, if awarded, and the judgment therefor shall be *136 satisfied when the sum named shall be fully paid, but not otherwise. 2. Change in Maintenance allowance. In event, by order of Court, the maintenance allowance should hereafter be increased, then the alimony allowance hereinbefore provided for shall be decreased by the amount of the increase in the maintenance allowance. The purpose of this provision is to insure that at no time during the period of this agreement shall first party pay a gross monthly sum in excess of or less than Two Hundred Fifty & No/100 ($ 250.00) Dollars. 3. Security. In order to secure the payment of the foregoing $ 27,000 Gross Allowances, first party agrees to deliver to second party policies aggregating Ten Thousand & No/100 ($ 10,000.00) Dollars on his life, payable without right of insured to change the beneficiary, as follows: $ 5,000 to Donna Sue Carmichael and $ 5,000 to second party. First party further agrees to deposit with the First National Bank of Kansas City, as Escrow Agent, additional policies on his life, with benefits aggregating $ 15,000.00 payable to second party as beneficiary, without the right of the insured to change the beneficiary as long as said policies shall remain on *137 deposit with the said Escrow Agent. Upon payment of the sum of Five Thousand & No/100 ($ 5,000) Dollars under this agreement, policies aggregating a like sum in benefits shall be released from the terms of the Escrow Agreement and delivered to first party. Second party agrees thereupon to execute consent for the change in beneficiary in such policies. When a further sum of Five Thousand ($ 5,000.00) Dollars shall be paid, a release in like amount shall be made by second party. When a total of Fifteen Thousand & No/100 ($ 15,000.00) Dollars shall be paid, the Escrow Agreement shall terminate. The remaining policies shall then be delivered to first party, meaning hereby only the policies held in Escrow. Each of the parties shall pay one-half of the Escrow Fee. The First party agrees to keep each of said policies in force. Each of said policies shall be unencumbered by any loans. On June 21, 1945, the Circuit Court of Jackson County, Missouri, entered a decree granting a divorce to Vieva Carmichael from petitioner upon her cross-petition. The decree provides, so far as is here material: It is further ordered, adjudged and decreed that the plaintiff pay to defendant, by way of an*138 allowance, in gross for alimony and maintenance, the sum of $ 27,000 in installments, payable as follows to-wit: $ 250.00 on the 15th day of June, 1945 and $ 250.00 on the 15th day of each month thereafter until the whole sum named is fully paid, without interest, except that the delinquent installments shall bear interest at the rate of 6 per cent per annum until paid. Of each monthly installment, the sum of $ 200.00 shall be considered as alimony and the sum of $ 50.00 shall be considered as maintenance for the support and education of the above-named child. In default of the payment of any one or more of said installments, defendant shall have execution therefor. * * * * It is further ordered that to secure the payment of the foregoing allowances, plaintiff shall deliver to defendant or to an escrow agent, to be agreed upon by the parties, life insurance policies on the life of the plaintiff, with benefits totalling not less than $ 25,000 as follows: (a) Policies providing for the benefits of not less than $ 5,000.00 designating the defendant as the beneficiary, or in case of her death, Donna Sue Carmichael, in *1359 which the beneficiary shall not be changed at any time*139 in the future, except upon consent of the beneficiary; (b) Policies providing for benefits of not less than $ 5,000.00 designating Donna Sue Carmichael as the beneficiary, or in case of her death, the defendant as beneficiary, in which the beneficiary shall not be changed at any time in the future, except upon consent of the beneficiary; (c) Policies providing for benefits of not less than $ 15,000.00 designating the defendant as beneficiary, or in event of her death, Donna Sue Carmichael, in which the beneficiary can not be changed so long as the policies are deposited with an escrow agent as security. * * * * The divorce decree was not appealed from or modified and was at all times after June 21, 1945, final and binding. At the time thereof petitioner was almost 47 years old. On or about June 12, 1945, petitioner delivered to Chet Vance and Lancie L. Watts, as escrow agents, eight policies of insurance on his own life, in the aggregate amount of $ 15,000, which he had taken out prior to the divorce proceedings. In seven of the policies petitioner's wife was designated as beneficiary, if living at his decease, otherwise to his executors, administrators, or assigns. In the eighth*140 policy, Vieva Carmichael was designated as the beneficiary if living at the time of petitioner's decease, otherwise to petitioner's daughter. In all eight of these policies petitioner reserved the right to change beneficiaries. Depositing these policies in escrow was in accordance with an "Escrow Agreement" dated June 12, 1945, which petitioner and his wife entered into along with Vance and Watts. This agreement, which was pursuant to the "Property Settlement Agreement," designated Vance and Watts as escrow agents, in lieu of the First National Bank of Kansas City named in the property settlement, and set forth the terms and conditions whereby the policies were to be delivered in escrow. It states in pertinent part: 1. Plaintiff hereupon delivers to Chet A. Vance and Lancie L. Watts, in escrow, and upon the conditions hereinafter imposed, life insurance policies on his life with benefits totalling not less than Fifteen Thousand & No/100 ($ 15,000.00) Dollars, designating defendant as the beneficiary, or in case of her death Donna Sue Carmichael as beneficiary. No change in the beneficiaries shall be made by the insured so long as the said policies are deposited with the Escrow*141 Agents as security. A Schedule of policies delivered under this agreement, showing the number of each policy, the name of the insurer, the amount of benefits provided, and the names of the beneficiaries designated therein, is hereto attached, marked "Schedule A", and made a part of this agreement. 2. When plaintiff shall pay defendant the sum of Five Thousand & No/100 ($ 5,000.00) Dollars to apply upon the judgment of the Court hereinabove mentioned, policies with benefits in a like amount shall be surrendered to plaintiff, and, if required by the insurer, defendant agrees to execute her consent to the change of beneficiaries. 3. When plaintiff shall pay defendant the further sum of Five Thousand & No/100 ($ 5,000.00) Dollars, additional policies with benefits in a like amount *1360 shall be surrendered to plaintiff under the same conditions for which provision is made in the preceding paragraph. 4. Upon the payment by plaintiff of the further sum of Five Thousand & No/100 ($ 5,000.00) Dollars, this agreement shall terminate. The remaining policies shall be surrendered to plaintiff under the same conditions as those imposed in paragraph 2, supra. * * * * The eight policies*142 constituted security for the payment of alimony to Vieva Carmichael and maintenance for the child required by the property settlement and the divorce decree. Petitioner also on June 14, 1945, pursuant to the property settlement agreement, made application to the New England Mutual Life Insurance Co. for two policies of insurance on his life, each in the sum of $ 5,000, and the policies were issued to him on the same date. The policies were the same except as to the beneficiary. One specified that the proceeds were payable to Vieva M. Carmichael as primary beneficiary and then to her daughter as secondary beneficiary. The other policy named Donna Sue Carmichael as primary beneficiary and her mother as secondary beneficiary. Each policy further specified that if neither the primary nor the secondary beneficiary survived petitioner, the proceeds were to be paid to the executors or administrators or assigns of the last survivor of the primary or the secondary beneficiary. Also, by the terms of each policy the primary beneficiary, if living, otherwise the secondary beneficiary, if living, otherwise the executors or administrators or assigns of the last survivor of the primary and *143 secondary beneficiary, owned the policy. The policies further provided that the beneficiaries were appointed without the right of revocation by the insured. Upon issuance of these two policies they were delivered to Vieva Carmichael and the same are still in her possession. She signed a receipt for the policies, reciting that she had received them from her former husband in compliance with that portion of paragraph 3 of the property settlement agreement which states: In order to secure the payment of the foregoing $ 27,000.00 Gross Allowances, first party agrees to deliver to second party policies aggregating Ten Thousand & No/100 ($ 10,000.00) Dollars on his life, payable, without right of insured to change the beneficiary, as follows: $ 5,000 to Donna Sue Carmichael and $ 5,000 to second party. The $ 5,000 policy, title to which was vested in the wife, constituted additional alimony under the decree and agreement incident thereto. The $ 5,000 policy, title to which was vested in Donna Carmichael, constituted an additional provision for her maintenance under the decree and agreement incident thereto. Petitioner was obligated by these instruments to maintain both these policies*144 in force for the rest of his life. *1361 During that part of 1945 which followed the divorce decree petitioner paid the cash sum of $ 1,300 to his former wife as alimony. During 1945 he also paid a total of $ 274.30 as premiums on the eight policies deposited in escrow and a total of $ 500.90 as premiums on the two $ 5,000 policies he had delivered to Vieva Carmichael. In his income tax return for 1945 petitioner claimed a deduction of $ 2,537.50 for alimony payments during the year, of which $ 1,237.50 was paid prior to entry of the divorce decree and $ 1,300 thereafter. In his "Explanation of Adjustments" set forth in the notice of deficiency, respondent stated in part: (b) Amount of $ 2,537.50 claimed in your return is disallowed as it does not constitute an alimony payment under the provisions of Section 23 (u) of the Internal Revenue Code. OPINION. From July 21, 1945, when Vieva Carmichael was granted a divorce, until December 31, 1945, petitioner paid $ 1,300 to his former wife in the form of cash installments of alimony, $ 274.30 as premiums on life insurance policies held in escrow, and $ 500.90 as premiums on two life insurance policies which he had delivered to her, *145 or a grand total of $ 2,075.20. The sole question for our determination is whether all or any portion of this $ 2,075.20 was includible in the gross income of Vieva Carmichael for 1945 under section 22 (k) of the code and thus was deductible by petitioner under section 23 (u) of the code. Both parties agree that the $ 2,075.20 was paid pursuant to the discharge of a legal obligation imposed by both the divorce decree and the property settlement agreement incident thereto. They also agree that additional cash installments paid by petitioner in 1945 for the maintenance of his daughter were not deductible by him under section 23 (u). Respondent contends that petitioner was not entitled to any deduction under section 23 (u) in 1945 because both the cash installments of alimony paid to his former wife and the insurance premiums he paid were installment payments of a specified principal sum payable over a period of less than 10 years and thus did not constitute periodic payments includible in the gross income of Vieva Carmichael for 1945 under section 22 (k). Petitioner contends that the premiums paid on both the escrowed insurance policies and those delivered to Vieva Carmichael were*146 constructively received by her and thus constituted income to her in 1945, as well as the cash installments of alimony which she actually received. He further asserts that under the property settlement agreement and divorce decree he was obligated to maintain in force for the rest of his life the two $ 5,000 policies which he delivered to his former wife so *1362 that the premiums of $ 500.90 which he paid on these policies in 1945 constituted periodic payments includible in Vieva Carmichael's income and therefore deductible by him. Petitioner finally contends that the provision of the property settlement agreement and the divorce decree relating to alimony are unitary and thus provision for cash installments of alimony and for the payment of premiums on the insurance policies held in escrow and delivered to his wife constituted inseparable parts of a single obligation. Consequently, in view of the indefinite total amount and indefinite duration of the premium payments on the policies delivered to Vieva Carmichael, the alimony obligation was not one for the payment of specified principal sum, but was one for periodic payments of an indefinite total amount. Thus petitioner*147 declares that he was entitled to deduct the entire sum of $ 2,075.20 in 1945 under section 23 (u). We agree with respondent that the cash payments of $ 200 a month which petitioner was required to pay to his former wife as alimony under the property settlement agreement and the divorce decree constituted installment payments of a specified principal sum due and payable within a period of less than 10 years and therefore were not periodic payments includible in Vieva Carmichael's income under section 22 (k). The terms of the agreement and decree clearly call for petitioner to pay a gross allowance to his former wife of $ 27,000 in cash installments of $ 250 per month, $ 200 as alimony and $ 50 for the support of Donna Carmichael. The effect of this provision is that petitioner was required to pay $ 21,600 as alimony and $ 5,400 as support for his child over a period of months totaling 9 years. Thus it is clear that the $ 1,300 which petitioner paid to his former wife in 1945 as alimony constituted installment payments which he was not entitled to deduct under section 23 (u). See J. B. Steinel, 10 T.C. 409. Turning to the insurance policies totaling*148 $ 15,000 which were deposited in escrow, we found as a fact, and petitioner admits, they were simply security for the payment of the first $ 15,000 of the gross allowance of $ 27,000. On the basis of this finding, we now hold that the premiums of $ 274.30 paid by petitioner on these escrowed policies in 1945 were not constructively received by his former wife so as to constitute income to her in that year. She did not actually receive any of the sums expended for the payment of these premiums. There was no certainty she would ever benefit from them. It is clear she received no immediate benefits as primary beneficiary, for petitioner retained ownership of the policies. Only in case her former husband died before the payment of $ 15,000 gross allowance and she survived him would she be sure to receive the proceeds of any of these policies. We note that petitioner was 47 years old just after the divorce decree *1363 was granted and that the first $ 15,000 of the gross allowance would be due and payable at the end of 5 years. Thus the possibility of benefit to Vieva Carmichael was quite remote. Furthermore, petitioner's wife was not the sole beneficiary of any of these eight*149 policies. An additional consideration is the fact these policies were to secure cash payments for the support of the child as well as cash payments of alimony, so that the premiums, in any event, would not benefit Vieva Carmichael alone. Under similar but less compelling circumstances, we held in Meyer Blumenthal, 13 T.C. 28, that the wife of the taxpayer did not constructively receive premiums on policies maintained by her husband to secure cash installments of alimony. The cases of Anita Quinby Stewart, 9 T.C. 195, and Estate of Boies C. Hart, 11 T.C. 16, cited by petitioner, are distinguishable from the instant case. In the former, insurance policies were irrevocably assigned to taxpayer's wife as alimony. In the latter the taxpayer's wife agreed to take as alimony a certain percentage of her husband's annual income and further agreed that the premiums on insurance for her benefit were to be paid out of and subtracted from the agreed percentage of his income she was to receive. The wife and son could cause the insurance to be reduced and thus increase the percentage of her husband's*150 income receivable in cash. When it is remembered that in the instant case all the escrowed policies were merely security for payment of part of the gross allowance, it is clear the cited cases are not in point. Regarding the two $ 5,000 policies which were delivered to Vieva Carmichael, respondent contends that they also constituted mere security for payment of the gross allowance of $ 27,000. Petitioner claims they were provided as additional alimony by the property settlement agreement and the divorce decree. At first blush respondent's contention seems correct, for the property settlement agreement, the divorce decree, and the receipt for the two $ 5,000 policies expressly state that the policies were security for payment of the $ 27,000. Yet, despite this language, closer examination of the agreement and decree, as well as consideration of both the terms of the two policies and the testimony of petitioner at the hearing convince us that the two policies constituted something more than mere security. The divorce decree sharply distinguished between the insurance policies totaling $ 15,000 in escrow and the two policies of $ 5,000 each. It provides as to the former that the*151 beneficiaries shall not be changed so long as the policies are deposited in escrow as security. As to the latter, it provides that the beneficiaries shall not be changed at any time in the future. If all the policies were mere security, we can not understand why the decree made a separate provision for the two $ 5,000 policies. Nor does this supposition explain why it provided that the beneficiary of each $ 5,000 policy should not be changed at any future *1364 time. This is certainly not language connoting security for payment of an obligation. The property settlement agreement, which formed the basis for the decree, expressly states that $ 15,000 of insurance shall be delivered in escrow and $ 10,000 of insurance shall be delivered to Vieva Carmichael. Further, it states that petitioner shall have no right to change the beneficiaries of the two $ 5,000 policies delivered to Vieva Carmichael, while it forbids petitioner to change the beneficiaries of the escrowed policies only so long as they are deposited in escrow. Again, we are not able to understand the distinction drawn between the escrowed policies and those delivered to petitioner's former wife unless the latter*152 were intended to be more than security. The language of the two $ 5,000 policies, which petitioner applied for pursuant to the terms of the property settlement agreement, clearly designates Vieva Carmichael as the primary beneficiary and owner of one and Donna Carmichael as the primary beneficiary and the owner of the other. Moreover, the designation of beneficiaries in the two policies was irrevocable. Thus, the terms of the two policies can not be harmonized with the interpretation of the property settlement agreement and the decree which respondent urges, for they are couched in terms of ownership rather than temporary retention for purposes of security. Furthermore, petitioner testified without contradiction at the hearing that at the time of the property settlement agreement it was understood that he was obliged to pay premiums on the two $ 5,000 policies for the rest of his life. We find the same difficulty of reconciling this statement with the view that the policies were mere security. We have found as a fact, therefore, that the $ 5,000 policy the title to which was vested in Vieva Carmichael constituted additional alimony under the terms of the property settlement agreement*153 and the decree. From the express language of the agreement and the plain implication of the decree, we have further found as a fact that petitioner was obligated to maintain this policy in force for the rest of his life. On the basis of these findings of fact, we now hold that the premiums of $ 250.45 petitioner paid on this policy in 1945 were constructively received by Vieva Carmichael so as to constitute a portion of her gross income for that year under section 22 (k). As present owner of this policy she derived many immediate benefits which she could exercise. Only if Vieva Carmichael failed to survive her husband would she fail to receive the full proceeds of the policy upon his death. The presence of such a contingency in the case of Estate of Boies C. Hart, supra, did not prevent us from determining that the premiums paid on the insurance for the wife's benefit were constructively received by her, nor does it deter us in the instant case. We further conclude that the *1365 premium payments on this insurance policy were clearly periodic within the meaning of section 22 (k), for petitioner was under an obligation to pay them for an indefinite*154 period, i. e., the remainder of his life. Thus we hold that petitioner was entitled under section 23 (u) to deduct the $ 250.45 he paid on this policy in 1945. Passing to the other $ 5,000 policy, the title to which was vested in Donna Carmichael, we have found as a fact that this constituted additional maintenance for the child's benefit under the provisions of the property settlement agreement and decree. From the express language of the agreement and the clear implication of the decree, we have further found that petitioner was obliged to pay the premiums on this policy during his life. Such an interpretation of these two instruments gives effect to the language therein providing that she be made primary beneficiary of the policy and is a logical corollary to the clear division of the cash payments of $ 250 per month which petitioner was required to pay Vieva Carmichael, $ 200 of which was for alimony and $ 50 of which was for the maintenance of Donna Carmichael. Furthermore, such an interpretation accords with the terms of the policy which vest present title therein to the child. To hold, as petitioner asserts, that this policy constituted additional alimony for Vieva Carmichael*155 fails to give effect to the language of the decree, the agreement incident thereto and the policy itself, which provided that she was only a secondary beneficiary of this insurance. The premiums of $ 250.45 paid in 1945 on this additional provision for maintenance of the child are expressly excluded from the income of Vieva Carmichael by section 22 (k) and therefore were not deductible by petitioner under section 23 (u) in 1945. Finally petitioner seeks to persuade us that the separate provisions for alimony imposed upon him by the property settlement agreement and decree are of such a unitary nature that they must be considered as a single obligation in applying section 22 (k). His contention would so link together the two separate provisions in the decree and agreement providing for alimony, i. e., the cash payments of $ 200 per month to Vieva Carmichael and the premium payments of $ 250.45 per year on the $ 5,000 policy whose title vested in her, that they would constitute a single alimony obligation to pay $ 2,650.45 per year for 9 years and $ 250.45 thereafter until petitioner's death. On the basis of this reasoning, petitioner concludes that the indefiniteness of both the*156 duration and final total of payments under such an alimony obligation qualifies them as periodic payments within the meaning of section 22 (k), and that he is thereby entitled to deduct $ 1,550.45, the aggregate of the cash payments of alimony to Vieva Carmichael and the premium payments of $ 250.45 he made from June 21, 1945, to the close of the year. *1366 Petitioner cites no authority for his unitary concept of the separate alimony obligations provided in this decree and agreement incident thereto, and we can find none. Section 22 (k) of the code clearly provides that installment payments discharging a part of an obligation the principal sum of which is specified in the decree or instrument shall not be considered periodic payments unless the principal sum is to be paid within a period extending over more than 10 years. The cash payments of $ 200 per month to Vieva Carmichael as alimony precisely fit this statutory definition of installment payments which shall not be considered periodic payments. To hold that such an obligation should be combined with an entirely separate and distinct alimony obligation which calls for periodic payments so that the aggregate payments under*157 the combined obligations are periodic would clearly defeat the statutory intent. It would then be possible for a taxpayer to provide in an agreement incident to divorce for payment of a principal sum of $ 100,000 in cash installments of $ 50,000 per year for a period of 2 years and yet deduct $ 50,000 a year as a periodic payment under section 23 (u) so long as he was careful to insert another provision in the agreement that he would vest title to a $ 1,000 insurance policy on his life in his wife and pay the premiums thereon for the rest of his life. We are convinced Congress did not intend such a result when it enacted section 22 (k). We thus hold that only $ 250.45 of the $ 2,075.20 that petitioner paid in 1945 qualifies as a deduction under section 23 (u). Decision will be entered under Rule 50.